Moody’s Stress Test Finds California Would Fare Poorly In Recession

SAN FRANCISCO (KCBS) – Among the big states, the California is the least able to ride out the next recession, according a stress test performed by Moody’s Investor Service.

Christopher Thornberg at Beacon Economics agrees. He analyzes the fiscal policies of California’s state and local government and believes recent history has shown us our Achilles heel.

“Our excessive reliance on income taxes as a state revenue source, in particular, of course, revenues associated with high-income earnings. The problem here is high-income earners also have some of the most volatile income overall,” Thornberg told KCBS.

Texas comes out on top in the Moody’s ranking because it depends on a more stable revenue source, property taxes.

“Ultimately taxing wealth instead of taxing effort, the difference between a property tax and an income tax, is economically a good idea,” Thornberg said.

How important is Moody’s, anyway? Thornberg said its credit ratings — and stress tests like these — do matter.

“If you are in finance in this state, and I mean if you are in city government, county government, state government. If you’re the treasurer, if you are the state controller, this means something because the state is going to pay more for the money it borrows,” Thornberg said.